Byline: Stephen L. Ferraro and Charles S. Amodio
As forensic CPAs, we are often asked to build (or rebut) financial models that estimate lost profits. Recovering lost profits generally requires the plaintiff to successfully address the following legal rules: the proximate cause rule, the reasonable certainty rule, and the foreseeability rule.
Having addressed the proximate cause rule in Part 1 of this two-part column, we offer discussion and supporting case law for the reasonable certainty and foreseeability rules below.
The reasonable certainty rule
The reasonable certainty principle is addressed in many cases and is usually successfully met when damages have been calculated using assumptions that are not speculative. The calculated damages may be an approximation, as courts mostly agree that proving reasonable certainty doesn't require precision.
In Palmer v. Connecticut Railway & Lighting Co., 311 U.S. 544 (1941), the U.S. Supreme Court concluded that certainty as to the amount of the damages goes no further than to require a basis for a reasoned conclusion. The decision goes on to state that certainty in the fact of damages is essential.
In Ameristar Jet Charter Inc. v. Dodson International Parts, 155 S.W. 3d 50 (2005), the issue of reasonable certainty arose and appeals were made regarding the calculation of lost profits damages. It was concluded that the claimant must establish the fact of damages with reasonable certainty, but it is not always possible to establish the amount of damages with the same certainty.
Based on Ashland Management v. Janien, 82 N.Y. 2d 395, 624 N.E. 2d 1007, 604 N.Y.S. 2d 912 (1993), damages should be reasonably certain, but do not require absolute certainty. Damages resulting from lost future profits are often approximate. The law doesn't require that they be determined with mathematical precision, but that they be measured based on known, reliable facts.
In DSC Communications v. Next Level Communications, 107 F.3d 322, 329 (5th Cir. 1997), the court upheld recovery of lost profits because the plaintiff's damage expert presented a damage model that included an assumption of future market share based on data obtained from respected sources in the telecommunications market and upon a showing that the plaintiff's history of strong performance in the field was indicative of likely success.
However, in Holt Atherton Ind., Inc. v. Heine, 835 S.W.2d 80 (Tex. 1992), the defendants sold a bulldozer to the plaintiffs...